Colombia in the eyes of worldwide private equity funds

Since Colombia started to develop Private Equity industry in 2005, the sector and its ecosystem have been grown rapidly and have been strengthened by important national and international players. In fact, a funds association called Colcapital has been created. Also, BANCOLDEX, entrepreneurial development bank, has supported the industry development with the objective of being a key investor for local funds by creating an investment instrument called BANCOLDEX CAPITAL. Currently, this entity is under a transformation program to become fund of funds.

The objective of these initiatives have focalized on offering companies access to new financing alternatives and promoting best practices activities in order to facilitate the industry understanding to investors and companies. Colombia has an environment composed by small and medium size companies and most of them have a familiar structure. Some of these enterprises have a difficult banking access and others need resources for internationalization process.

Colombian government has implemented programs to promote entrepreneurs, e.g. Innpulsa, in order to sponsor start –up and issued other laws (Decree 2555 of 2010) which have allowed local pension funds to invest in private equity. Also, Insurance companies and local endowments are in the involving process to become part of domestic ecosystem.

With regard to growth economy, Colombia registered 4,6% by 2014 and according to the last report of the IMF, the forecast is 3,4% for 2015, which is higher than other countries in the region. In terms of Gross Domestic Product, it has increased three times in only one decade, from USD 2.261 by 2003 to USD 8.031 by 2013.

Under this framework, Colombia is still an investment attractive country as long as it has been pointed within the twenty main destinations for direct foreign investment by UNCTAD – World Investment Report 2013 and 2014. Also, it is a country with more than 47 million inhabitants with a middle class under growing process. To date, almost 30% of population is part of the middle class, the forecast, is to get 37% by 2020, according to Fedesarrollo.

Nevertheless, private equity and venture capital industry is still not a mature sector in the economy by reason of most of funds are still under the investment period. Many companies are attractive for investment due their excellent economic performance in spite of there is not much track record to be showed.

In addition, Colombia established legislative tools to attract private equity investors, in this sense,   Decree 2555 of 2010, modified by Decree 1242 of 2013 were issued to regulate the incorporation and management of funds. Immediately, it has allowed the growth of this industry, from one fund by 2005 to 57 funds by 2015. Also, Colombia has stablished laws for minority shareholders rights and for corporative government by Law 222 of 1995, Law 275 of 2001, among others.

Regarding the incorporation of a Private Equity fund in Colombia, it requires at least two investors and it does not need approval for existence from the Financial Superintendence of Colombia (“SFC for its acronym in Spanish), it is necessary to notice at least 15 working days prior the Private Equity Fund has been created, by showing the following documents:

• Bylaws model

• Professional Manager profile

• Copy of the minute of the board of directors of the Management Company by which the bylaws model is approved

• Certificate issued by Management Company documenting the compliance with legal requirements

Furthermore, bylaws must contain investments criteria and management policies, characteristics and organic structure of the fund, thus:

• Managers companies: It is an entity that must be brokerage companies, trust firms or assets management companies. This election depends on the General Partner decision at the moment of arranging the business structure. It is a party in charge of managing and administrating the fund.

• Professional Manager: It is individual or entity responsible for administration and management of assets. Also, it is in charge of doing capital calls, approval of investors, and selection of portfolios, among others.

• Investment Committee: It is responsible for analyzing and determining investments quotas. Purchases and liquidation processes must be approval by this board.

• Monitoring and controlling Committee: It is in charge of attending compliance of the duties assigned to the Management Company and Professional Manager. It also check that investments decisions are made in accordance with the investment criteria, among others.

• General Investment Meeting: It is composed by all the investors involved in the business. Most duties are stablished in the bylaws.

Moreover, Financial Superintendence is the entity responsible for controlling and monitoring the Managers Companies which are in charge of preparing reports before this controlling organism.

In reference to taxation, according to Tax Code (Estatuto Tributario in Spanish), Private Equity Funds are considered as a transparent vehicle for tax purposes, it means, these funds are not taxpayers of income tax.

In consequence, Colombia has been ranked in the 4th position among 12 countries in Latam and the Caribbean since 2010 to update, by Latin American Private Equity & Venture Capital Association (LAVCA), because it is a country that has made a lot of legal and economic measures and created good conditions for private equity and venture capital environment. Also, there is a large number of opportunities for worldwide funds to take advantage of companies and to use the country as a hub for internationalizing enterprises in the region.

Juan Sebastian Perez Villarreal

Attoney from Externado University of Colombia, specialized in Contract Law and candidate to ProjectManagement Master at Valecia University in Spain. Currently, Mister Perez -Villarreal is working for Invest in Bogota as Business Developer Officer. In addition, He has worked for Procolombia (Promoation Agency of the Colombian government)as Investment Specialist for Private Equity and Tourism Infrastructure industries and he has performed as a lawyer advisor for other companies, such as, Energy Transmission of Bogotá Company, Fiduciaria Bogota and Suramericana Insurance Company. Email: jjssvv@gmail.com